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Monday, October 10, 2016

SPX Update -- and One Rarely-Discussed Aspect of Trading Rules That Will Make or Break You

Since the market is still stuck in the trading range, we're going to talk about trading psychology. I'm going to cover three interrelated topics, which connect in a subtle way that isn't often discussed. Since we're still in a trading range, and that can lead to a less-than-exciting trading day, let's start there...

One of the biggest enemies of the trader is boredom.Contrary to popular belief (especially among
teens), boredom does not come about from having a lack of “fun” things to do.It comes about from a lack of productive things
to do.In my opinion, boredom is simply
one of several symptoms that can develop from a feeling of general emptiness.And while that emptiness can be glossed over
and temporarily hidden with frenzied “fun,” it cannot be truly filled by
vacuous activity.

That’s why we quickly grow bored again as soon as the fun stops:It doesn’t nourish us in any lasting manner;
and certainly not in the way that truly productive accomplishments do.After a meaningful accomplishment, we can sit
and rest for a while, and we feel satisfied from a job well done.We can be doing “nothing,” but we are not
bored... because the emptiness has been filled (at least partially), or our
self-esteem has grown, or our character has been enhanced, or some necessary task
has been accomplished -- or all of the above.

This is why “fun” works as a reward for productivity (after we're in the fulfilling mindset that accomplishment brings), but it does not support
being chased endlessly for its own sake.When fun is treated as an end in itself, the emptiness may retreat into
the background momentarily, but it never goes away.

Anyway, my point is that many traders understand this, at
least instinctively (whether or not they’ve ever put it into words).The problem isn’t that they’re too lazy, the
problem is that they can become hooked on trying too hard to accomplish
something productive.

And that leads to overtrading.It leads to forcing trades. It leads to bad decisions, and, sometimes, to acts
of outright desperation.Is there a
solution?

Well, the solution may be to redefine our individual views
of “productive” action.I’ve often
preached that non-action can be just as important as action.If a trader has clear rules, then they can
derive a sense of accomplishment from NOT taking entries that violate their
rules. This is easier said than done, because the market is virtually
always going to do something in the way of movement.So when one resists, say, a buy entry because
it violates their rules… and then the (untaken) trade goes on to develop into
what would have been a 1000% gain, it can feel like you did the wrong
thing.

Which leads us to the area I don’t hear talked about
regarding rules:The psychological
importance.Everyone talks about how you
need rules to maintain discipline, and that’s true – but you also need rules to
defend yourself psychologically against the one (potential) enemy who knows
your every weakness:Yourself.That may, in fact, be the most important
aspect of trading rules.

With clear rules, you have an emotional fallback when that
trade you never took goes on to become the greatest winner in history.You can chalk it up to luck, or blind chance,
or whatever (because it probably was), and say to yourself, “Hey, good for the
people that took that trade.I didn’t
take that trade because MY system didn’t give me any reason to.”And you can get on with your life. And your next trade.

But without clear rules, you will beat yourself up endlessly
for not taking that big-winner trade -- because without rules, you don’t really know WHY you
didn’t take the trade.How can you
defend yourself if you don’t know why you didn’t take the trade, you just know
it was a huge winner?Just like in life,
without clear guiding principles, your entire position is psychologically
untenable over the long haul.

So my point is this:Without
a well-defined trading system, you walk an endless edge where you are always
one trade away from total destruction.The
amazing thing is, this one single trade can destroy you even if you never took the trade! Because the repercussions of one “incredible missed trade” will
put you in the absolute wrong mindset to make your next trades successful.You’ll be operating under a psychological gun
of regret, and in a “not gonna miss the next one!” mentality -- and you’ll be
tempted to jump into every long-shot, high-risk trade you can lay your hands
on.And (unless you get really lucky and hit a big winner),
as the money dwindles, your mindset will rapidly spiral out of control.

So do yourself a favor, if you haven’t already:Before you enter another trade, sit down and
figure out exactly what your rules are.Then agree to support yourself emotionally for honoring those rules.Period.Honoring your rules is your “win” -- that’s your productive activity.No matter what happens to the trade (or non-trade!) afterwards.
As you go along, of course, periodically
review and adjust your rules if you see areas that need improvement.But
stick to your rules, and never beat yourself up for maintaining discipline. No
matter how it ends up.

You now have a psychologically-tenable position from which
to advance or retreat as you see fit.You
have the emotional foundation needed to support yourself through the inevitable
ups and downs.And you are no longer one
bad trade, or one missed trade, away from going on tilt and wiping yourself
out.

Chart-wise, there's nothing to update but the near-term chart, so I've done so below. For the larger bull/bear options, please refer back to the prior update:

In conclusion, the short-term pattern suggests that Friday's high was a b-wave, thus likely destined to be broken (although all that's technically required is a break of the red a wave high). As I discussed in depth last update, I continue to feel bears should be cautious here, and only short the upper edges of this range, if they short at all. Trade safe.

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